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This Global Week Ahead delivers another impressive U.S. corporate reporting slate.
The following earnings note came from Zacks’ Research Director Sheraz Mian--
He wrote this last Friday:
“The U.S. stock markets appear to be shrugging off a very strong and reassuring run of Q4 earnings results.
“Unusual and speculative trading activities in a few heavily shorted stocks has been dominating that market discourse.
“Then again, the market had already discounted this improving earnings picture. As reflected in the strong gains over the last few months.
“After all, stocks don’t move up in a straight line. And they are up more than +15% in the last three months.
“Rather, this appears to be a rerun of a ‘Sell-the-News’ type of reaction.
“As such, ongoing market weakness may not be tied to what’s happening to GameStop (GME - Free Report) .
“Market volatility notwithstanding, we have to acknowledge the fundamental backdrop —as reflected in the outlook for earnings and interest rates (emphasis mine) — remains very favorable.”
“In the week ahead, we expect this favorable trend to strengthen and accelerate.
“We get into the heart of the Q4 earnings season. More than 400 companies are on deck to report results, including 103 S&P 500 index members. By the end of this week, we will have seen Q4 results from more than 57% of S&P 500 members.
“Importantly, this week’s line-up includes a representative cross-section of the economy, ranging from traditional bellwethers like:
Next are Reuters’ five world market themes, reordered in importance for equity traders.
(1) GameStop has gone global
In just a week, the “Reddit crowd” trade which squeezed out seasoned hedge funds from GameStop has gone global.
Herding on the other side of bearish bets proved so profitable in GameStop and other shorted American stocks that it didn’t take long for copycats to emerge across the globe.
On Jan. 26th, a seemingly random buying frenzy lifted a handful of stocks across Europe. Soon enough, traders spotted what UK publisher Pearson, German drug maker Evotec and property firm Unibail-Rodamco had in common: they were among Europe’s most shorted stocks.
The moves then spread to Asia; on Jan. 28th heavily shorted Australian stocks Webjet, Tassal and InvoCare climbed while Malaysian retail investors debated buying into medical glove makers to squeeze out short-sellers.
The “Reddit crowd” has impacted mainstream markets by forcing hedge funds to sell favored stocks to cover losses.
With short bets outstanding against some 5,000 U.S. companies, the action may continue.
(2) Does the size of the U.S. National debt matter to Treasury bond rates?
U.S. national debt ballooned 40% under Donald Trump, and President Joe Biden is expected to keep the debt pile growing.
On Monday, the Treasury announces its quarterly refunding plan, followed on Wednesday with details of anticipated auction sizes for each maturity.
It is seen keeping auction sizes steady; even after the enactment of a $900 billion stimulus package, the Treasury should be able to meet 2021 financing needs, Wells Fargo reckons.
Some worry so much borrowing could tarnish the appeal of U.S. debt.
Even if Biden doesn’t push through his entire $1.9 trillion spending plan, stimulus expectations were among factors that recently pushed Treasury yields to 10-month highs.
(3) Will Europe’s big banks end up in COVID-related trouble?
Some of Europe’s biggest banks — Santander, Deutsche Bank and Intesa — soon report results for 2020, a difficult year when lockdowns stalled the economy and put millions of borrowers in financial peril.
The view from Refinitiv I/B/E/S data is for earnings to have contracted more than 50% last year and then rebounded 63% in 2021.
Yet, Europe’s slow vaccine rollout pace is a worry; continued lockdowns would raise uncertainty over whether heavily indebted Europeans can ever repay their loans.
So, pay attention in banks’ statements to the number of borrowers still taking payment holidays for car loans or mortgages. And also watch the volume of loans the lenders are reclassifying as at a higher risk of not being repaid.
(4) Italian banks and politics live in tumultuous times
A key deal-making week lies ahead for Italy.
The fate of the world’s oldest bank, Monte dei Paschi, is in the hands of Andrea Orcel, the new man in charge at bigger rival UniCredit.
Italy’s Treasury has been studying a sale of struggling state-owned MPS to UniCredit, with hopes for talks to kick off this month. So Orcel, a renowned dealmaker could well be steering the future of not one but possibly two Italian banks.
In Rome, meanwhile, ruling parties are having to forge a new deal with Italian Viva, which quit the government and forced the resignation of Prime Minister Giuseppe Conte.
The pandemic and the steepest recession since the end of World War 2 add a sense of urgency to the deal making.
(5) Japan’s 2021 Olympic Games: with or without fans?
Japan has a lot riding on a mass vaccine rollout, above all its aim to bring thousands of athletes and fans to Tokyo in July for the Summer Olympic games postponed from 2020.
The organizing committee says there are no doubts or objections from partners, including the IOC and sporting federations. The government has decided to procure COVID-19 vaccines locally to avoid delays in inoculating its population.
A news conference on Tuesday will provide an update of its plans.
Insurers and local sponsors such as Dentsu Group and Asics Corp have billions riding on the Games.
They can only hold their breath until the Olympic torch relay begins in March.
Top Zacks #1 Rank (Strong Buy) Stocks
Is the run in the global mining stocks over? At a minimum, it is worth second-guessing.
Consider the status of the following top mining stocks:
(1) Rio Tinto (RIO - Free Report) : This Australian mining stock prices at $76 a share and makes for a market cap of $95B. I see a Zacks Value score of B, a Zacks Growth score of A, and a Zacks Momentum score of B.
It was a $86 a share stock a few weeks ago.
(2) Vale S.A. (VALE - Free Report) : This Brazilian iron ore miner is now tied to a $16 a share stock. That makes for a $82.8B market cap. I see a Zacks Value score of B, a Zacks Growth score of B, and a Zacks Momentum score of D.
It was a $19 a share stock a few weeks ago.
(3) Anglo American ADR (NGLOY - Free Report) : This is another big global miner, based in London, U.K. I see the shares priced at $16.50. That gives this stock a $45B market cap. I see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of B.
The company mining portfolio includes iron ore, manganese, metallurgical coal, copper, nickel, platinum and diamonds.
This was a $19 a share stock a few weeks ago.
Iron ore prices hit a double top on Jan. 15th at $172 a ton. They traded last Friday at $158 a ton. That makes for a 9% decline.
The last two mining stocks are off around 19%. So the mining stocks are effectively a 2X leveraged trade on the underlying.
Key Global Macro
This macro data week starts out with a slew of manufacturing PMIs.
Then, the mid-week goes into a set of Australian and U.K. monetary policy decisions (following the Fed from last week).
The trading week ends with a fresh U.S. nonfarm payroll number.
On Monday, a big day for Markit PMIs. I see the Euro area Markit manufacturing PMI could rise to 55.5 from 54.7.
The Euro Area unemployment rate could stay flat at 8.3%.
The U.S. Markit manufacturing PMI will be of interest too. Last month, it was 59.
On Tuesday, the Reserve Bank of Australia (RBA) should leave their policy rates at 0.1%.
Q4 Eura Area GDP likely fell -6%, after falling -4.3% in the prior quarter. That shows the effect of fresh lockdowns there.
On Wednesday, the Euro Area services PMI should be flat at 45.0. The key global point? Good manufacturers thrive in a COVID environment. Services contract.
On Thursday, Euro Area retail sales could be up +1.3% in December.
The Bank of England (BoE) will come out with a monetary policy statement.
On Friday, U.S. nonfarm payrolls likely fell to +85K in January, after coming in at -140K in December. That’s another shutdown effect.
Conclusion
Is this bout of U.S. benchmark index weakness just a “Sell-the-News” stock market action? Not related to the Reddit social media Stomp, as Sheraz Mian surmises?
Sure. It is a worthy insight. Institutional traders are taking profits off the table, respecting very rich, fully priced in, stock market valuations.
However, there is a lot of risk de-leveraging and capital building going on, too.
Hedge fund Wall Street and this raging mass of retail stock traders are going to stay at war. Getting capital reserves built up is a way to endure that stress. And cover the losses.
Even if your stocks are not in the crosshairs.
i. Click the next two hotlinks
Click on Reddit’s wallstreetbets trading room message board. Note it has now grown to hold 7.8 million members. This number grew by 1 million over the last weekend (Jan. 30-31, 2021).
According to their own facts page,
“/r/wallstreetbets is a community for making money and being amused while doing it. Or realistically, a place to come and upvote memes when your portfolio is down.”
Click this second link to gain the stock market religion. This concerns a key slice of the broader Reddit chat narrative. 288K of these (3.7%) are Buying FDs. This number grew by just 1k over the last weekend.
FD is a slang acronym. (Best to click the link to find out what those two words are!!).
The hard-core options-buying part of the larger group call themselves this.
ii. This excerpt comes from that second hot link
“FD’s is Wall Street Bets slang for out of the money options expiring within a week.
“They are very high risk and have a high chance of failure. But the small chance of success can have tremendous upside. Basically, options give you the opportunity to buy 100 shares of a stock upon the expiration date.
“However, you don’t need to wait until the expirations date to make money. You can actually buy and sell options based on the current price of it. The price of an option is determined by its intrinsic value plus its time premium.
“Since FD’s are usually out of the money there’s no intrinsic value to worry about accounting for.
“So, all of the price comes from time premium which in a weekly option should be close to zero.
“Wall street betters are basically betting that the stock price will go above their strike price plus the cost of the premium before the expiration date.
“If it does, they’ll make a ton of money since FD’s tend to be highly unlikely and if an option somehow does meet the strike price then that wall street better just won the stock market lottery and can hit the fabled 10 bagger (1000% gain).”
Interesting, eh?
iii. Let’s dig into this
Firstly, this looks to be a leverage-on-leverage war of conquest.
This is the term for a military conflict where one state, nation, or people conquers or attempts to conquer another.
According to the Wall Street Journal, the hedge fund shorter Melvin Capital lost 53% in January, hurt by GameStop and other bets. Citadel, its partners and Point72 took losses from their investment in the hedge fund. It started the year with about $12.5 billion and now runs ~$8 billion, including $2.75 billion in emergency funds.
Via CNBC, we have learned that short-selling hedge funds suffered a mark-to-market loss of $19.75 billion YTD in the brick-and-mortar video game retailer GameStop, according to data they drew from S3 Partners.
Still, the short-sellers mostly are holding onto their bearish positions. Or they are being replaced by new hedge funds willing to bet against the stock.
GME was trading at $300 a share in the Monday Feb. 1st premarket.
Secondly, a separate, much nerdier, economist term to apply here is contagion (aka a rapid communication of an influence).
Very likely, due to both the leverage and the contagion, knock-on effects from this Reddit discussion group are multiples larger than either the 7.8m or 288k numbers imply.
Exhibit A—
r/Wallstreetbets users have now bought GME billboards in New York City, San Diego, San Jose, Salt Lake City, Orlando, Dallas, Austin, Oklahoma City and Colorado Springs.
The list continues to grow.
Exhibit B—
According to Goldman Sachs Prime Services, last week represented the largest active hedge fund de-grossing since February 2009.
Funds in their coverage sold long positions and covered shorts in every sector.
Thirdly, last week, Small Trader Call Buys to Open topped out at an almost unbelievable 87.3 million contracts, with a value of $44.4 billion in terms of premiums spent.
8 million is a typical number for these types of option contracts traded!
Do this math appraisal. Divide $44.4 billion in call premiums by 288,000 FD buyers.
That computes to $152,777 for each FD.
That math doesn’t make sense, on the face of it. Some big institutional guys are in the mix. Or these FD guys are all in, with their life savings, on a few select trades. Or there are really multiples more of these FD guys.
In sum, I think that “Buying FD” group did add to the downside stock market pressure.
However, the S&P 500 index has a current market capitalization — of somewhere in the range of $31.6 trillion.
That’s a big, big, big dog.
Then add on the listed, liquid, U.S. smalls caps. Shorting is a bigger deal here.
Then add the stock trading universe outside the USA.
iv. In light of this diligence, my closing point will be this—
Have a great trading week, amidst this volatility.
Render your closest attention to the nuances.
Inside this r/WallStreetBets story.
Regards,
John Blank
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Did r/WallStreetBets Smother the Bull Market?
This Global Week Ahead delivers another impressive U.S. corporate reporting slate.
The following earnings note came from Zacks’ Research Director Sheraz Mian--
He wrote this last Friday:
“The U.S. stock markets appear to be shrugging off a very strong and reassuring run of Q4 earnings results.
“Unusual and speculative trading activities in a few heavily shorted stocks has been dominating that market discourse.
“Then again, the market had already discounted this improving earnings picture. As reflected in the strong gains over the last few months.
“After all, stocks don’t move up in a straight line. And they are up more than +15% in the last three months.
“Rather, this appears to be a rerun of a ‘Sell-the-News’ type of reaction.
“As such, ongoing market weakness may not be tied to what’s happening to GameStop (GME - Free Report) .
“Market volatility notwithstanding, we have to acknowledge the fundamental backdrop — as reflected in the outlook for earnings and interest rates (emphasis mine) — remains very favorable.”
“In the week ahead, we expect this favorable trend to strengthen and accelerate.
“We get into the heart of the Q4 earnings season. More than 400 companies are on deck to report results, including 103 S&P 500 index members. By the end of this week, we will have seen Q4 results from more than 57% of S&P 500 members.
“Importantly, this week’s line-up includes a representative cross-section of the economy, ranging from traditional bellwethers like:
To new leaders like
And many others in the middle.”
Next are Reuters’ five world market themes, reordered in importance for equity traders.
(1) GameStop has gone global
In just a week, the “Reddit crowd” trade which squeezed out seasoned hedge funds from GameStop has gone global.
Herding on the other side of bearish bets proved so profitable in GameStop and other shorted American stocks that it didn’t take long for copycats to emerge across the globe.
On Jan. 26th, a seemingly random buying frenzy lifted a handful of stocks across Europe. Soon enough, traders spotted what UK publisher Pearson, German drug maker Evotec and property firm Unibail-Rodamco had in common: they were among Europe’s most shorted stocks.
The moves then spread to Asia; on Jan. 28th heavily shorted Australian stocks Webjet, Tassal and InvoCare climbed while Malaysian retail investors debated buying into medical glove makers to squeeze out short-sellers.
The “Reddit crowd” has impacted mainstream markets by forcing hedge funds to sell favored stocks to cover losses.
With short bets outstanding against some 5,000 U.S. companies, the action may continue.
(2) Does the size of the U.S. National debt matter to Treasury bond rates?
U.S. national debt ballooned 40% under Donald Trump, and President Joe Biden is expected to keep the debt pile growing.
On Monday, the Treasury announces its quarterly refunding plan, followed on Wednesday with details of anticipated auction sizes for each maturity.
It is seen keeping auction sizes steady; even after the enactment of a $900 billion stimulus package, the Treasury should be able to meet 2021 financing needs, Wells Fargo reckons.
Some worry so much borrowing could tarnish the appeal of U.S. debt.
Even if Biden doesn’t push through his entire $1.9 trillion spending plan, stimulus expectations were among factors that recently pushed Treasury yields to 10-month highs.
(3) Will Europe’s big banks end up in COVID-related trouble?
Some of Europe’s biggest banks — Santander, Deutsche Bank and Intesa — soon report results for 2020, a difficult year when lockdowns stalled the economy and put millions of borrowers in financial peril.
The view from Refinitiv I/B/E/S data is for earnings to have contracted more than 50% last year and then rebounded 63% in 2021.
Yet, Europe’s slow vaccine rollout pace is a worry; continued lockdowns would raise uncertainty over whether heavily indebted Europeans can ever repay their loans.
So, pay attention in banks’ statements to the number of borrowers still taking payment holidays for car loans or mortgages. And also watch the volume of loans the lenders are reclassifying as at a higher risk of not being repaid.
(4) Italian banks and politics live in tumultuous times
A key deal-making week lies ahead for Italy.
The fate of the world’s oldest bank, Monte dei Paschi, is in the hands of Andrea Orcel, the new man in charge at bigger rival UniCredit.
Italy’s Treasury has been studying a sale of struggling state-owned MPS to UniCredit, with hopes for talks to kick off this month. So Orcel, a renowned dealmaker could well be steering the future of not one but possibly two Italian banks.
In Rome, meanwhile, ruling parties are having to forge a new deal with Italian Viva, which quit the government and forced the resignation of Prime Minister Giuseppe Conte.
The pandemic and the steepest recession since the end of World War 2 add a sense of urgency to the deal making.
(5) Japan’s 2021 Olympic Games: with or without fans?
Japan has a lot riding on a mass vaccine rollout, above all its aim to bring thousands of athletes and fans to Tokyo in July for the Summer Olympic games postponed from 2020.
The organizing committee says there are no doubts or objections from partners, including the IOC and sporting federations. The government has decided to procure COVID-19 vaccines locally to avoid delays in inoculating its population.
A news conference on Tuesday will provide an update of its plans.
Insurers and local sponsors such as Dentsu Group and Asics Corp have billions riding on the Games.
They can only hold their breath until the Olympic torch relay begins in March.
Top Zacks #1 Rank (Strong Buy) Stocks
Is the run in the global mining stocks over? At a minimum, it is worth second-guessing.
Consider the status of the following top mining stocks:
(1) Rio Tinto (RIO - Free Report) : This Australian mining stock prices at $76 a share and makes for a market cap of $95B. I see a Zacks Value score of B, a Zacks Growth score of A, and a Zacks Momentum score of B.
It was a $86 a share stock a few weeks ago.
(2) Vale S.A. (VALE - Free Report) : This Brazilian iron ore miner is now tied to a $16 a share stock. That makes for a $82.8B market cap. I see a Zacks Value score of B, a Zacks Growth score of B, and a Zacks Momentum score of D.
It was a $19 a share stock a few weeks ago.
(3) Anglo American ADR (NGLOY - Free Report) : This is another big global miner, based in London, U.K. I see the shares priced at $16.50. That gives this stock a $45B market cap. I see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of B.
The company mining portfolio includes iron ore, manganese, metallurgical coal, copper, nickel, platinum and diamonds.
This was a $19 a share stock a few weeks ago.
Iron ore prices hit a double top on Jan. 15th at $172 a ton. They traded last Friday at $158 a ton. That makes for a 9% decline.
The last two mining stocks are off around 19%. So the mining stocks are effectively a 2X leveraged trade on the underlying.
Key Global Macro
This macro data week starts out with a slew of manufacturing PMIs.
Then, the mid-week goes into a set of Australian and U.K. monetary policy decisions (following the Fed from last week).
The trading week ends with a fresh U.S. nonfarm payroll number.
On Monday, a big day for Markit PMIs. I see the Euro area Markit manufacturing PMI could rise to 55.5 from 54.7.
The Euro Area unemployment rate could stay flat at 8.3%.
The U.S. Markit manufacturing PMI will be of interest too. Last month, it was 59.
On Tuesday, the Reserve Bank of Australia (RBA) should leave their policy rates at 0.1%.
Q4 Eura Area GDP likely fell -6%, after falling -4.3% in the prior quarter. That shows the effect of fresh lockdowns there.
On Wednesday, the Euro Area services PMI should be flat at 45.0. The key global point? Good manufacturers thrive in a COVID environment. Services contract.
On Thursday, Euro Area retail sales could be up +1.3% in December.
The Bank of England (BoE) will come out with a monetary policy statement.
On Friday, U.S. nonfarm payrolls likely fell to +85K in January, after coming in at -140K in December. That’s another shutdown effect.
Conclusion
Is this bout of U.S. benchmark index weakness just a “Sell-the-News” stock market action? Not related to the Reddit social media Stomp, as Sheraz Mian surmises?
Sure. It is a worthy insight. Institutional traders are taking profits off the table, respecting very rich, fully priced in, stock market valuations.
However, there is a lot of risk de-leveraging and capital building going on, too.
Hedge fund Wall Street and this raging mass of retail stock traders are going to stay at war. Getting capital reserves built up is a way to endure that stress. And cover the losses.
Even if your stocks are not in the crosshairs.
i. Click the next two hotlinks
Click on Reddit’s wallstreetbets trading room message board. Note it has now grown to hold 7.8 million members. This number grew by 1 million over the last weekend (Jan. 30-31, 2021).
According to their own facts page,
“/r/wallstreetbets is a community for making money and being amused while doing it. Or realistically, a place to come and upvote memes when your portfolio is down.”
Click this second link to gain the stock market religion. This concerns a key slice of the broader Reddit chat narrative. 288K of these (3.7%) are Buying FDs. This number grew by just 1k over the last weekend.
FD is a slang acronym. (Best to click the link to find out what those two words are!!).
The hard-core options-buying part of the larger group call themselves this.
ii. This excerpt comes from that second hot link
“FD’s is Wall Street Bets slang for out of the money options expiring within a week.
“They are very high risk and have a high chance of failure. But the small chance of success can have tremendous upside. Basically, options give you the opportunity to buy 100 shares of a stock upon the expiration date.
“However, you don’t need to wait until the expirations date to make money. You can actually buy and sell options based on the current price of it. The price of an option is determined by its intrinsic value plus its time premium.
“Since FD’s are usually out of the money there’s no intrinsic value to worry about accounting for.
“So, all of the price comes from time premium which in a weekly option should be close to zero.
“Wall street betters are basically betting that the stock price will go above their strike price plus the cost of the premium before the expiration date.
“If it does, they’ll make a ton of money since FD’s tend to be highly unlikely and if an option somehow does meet the strike price then that wall street better just won the stock market lottery and can hit the fabled 10 bagger (1000% gain).”
Interesting, eh?
iii. Let’s dig into this
Firstly, this looks to be a leverage-on-leverage war of conquest.
This is the term for a military conflict where one state, nation, or people conquers or attempts to conquer another.
According to the Wall Street Journal, the hedge fund shorter Melvin Capital lost 53% in January, hurt by GameStop and other bets. Citadel, its partners and Point72 took losses from their investment in the hedge fund. It started the year with about $12.5 billion and now runs ~$8 billion, including $2.75 billion in emergency funds.
Via CNBC, we have learned that short-selling hedge funds suffered a mark-to-market loss of $19.75 billion YTD in the brick-and-mortar video game retailer GameStop, according to data they drew from S3 Partners.
Still, the short-sellers mostly are holding onto their bearish positions. Or they are being replaced by new hedge funds willing to bet against the stock.
GME was trading at $300 a share in the Monday Feb. 1st premarket.
Secondly, a separate, much nerdier, economist term to apply here is contagion (aka a rapid communication of an influence).
Very likely, due to both the leverage and the contagion, knock-on effects from this Reddit discussion group are multiples larger than either the 7.8m or 288k numbers imply.
Exhibit A—
r/Wallstreetbets users have now bought GME billboards in New York City, San Diego, San Jose, Salt Lake City, Orlando, Dallas, Austin, Oklahoma City and Colorado Springs.
The list continues to grow.
Exhibit B—
According to Goldman Sachs Prime Services, last week represented the largest active hedge fund de-grossing since February 2009.
Funds in their coverage sold long positions and covered shorts in every sector.
Thirdly, last week, Small Trader Call Buys to Open topped out at an almost unbelievable 87.3 million contracts, with a value of $44.4 billion in terms of premiums spent.
8 million is a typical number for these types of option contracts traded!
Do this math appraisal. Divide $44.4 billion in call premiums by 288,000 FD buyers.
That computes to $152,777 for each FD.
That math doesn’t make sense, on the face of it. Some big institutional guys are in the mix. Or these FD guys are all in, with their life savings, on a few select trades. Or there are really multiples more of these FD guys.
In sum, I think that “Buying FD” group did add to the downside stock market pressure.
However, the S&P 500 index has a current market capitalization — of somewhere in the range of $31.6 trillion.
That’s a big, big, big dog.
Then add on the listed, liquid, U.S. smalls caps. Shorting is a bigger deal here.
Then add the stock trading universe outside the USA.
iv. In light of this diligence, my closing point will be this—
Have a great trading week, amidst this volatility.
Render your closest attention to the nuances.
Inside this r/WallStreetBets story.
Regards,
John Blank